Financial technology, or fintech, companies are likely to be a high-growth market for years to come. Cash is becoming less convenient to use, and it's more economical for financial institutions and individuals to utilize technology. With that in mind, here's why three of our contributors think PayPal (NASDAQ:PYPL), Square (NYSE:SQ), and Guidewire Software (NYSE:GWRE) are worth a look right now.
PayPal's growing network effect
Matthew Cochrane (PayPal Holdings): PayPal's 2019 first quarter was business as usual for the digital wallet platform. The company's total revenue grew to $4.13 billion, a 12% increase year over year, and adjusted earnings per share (EPS) rose to $0.78, a 37% increase over last year's first quarter. This strong growth was powered by the potent combination of new user growth and increased user engagement. Revenue was docked 7 percentage points from the sale of PayPal's consumer credit portfolio to Synchrony Financial last year.
In Q1, 9.3 million users were added to the company's platforms, raising the total of active users to 277 million, including 40 million Venmo accounts and 22 million merchant accounts. Management believes this number can reach as high as 300 million by the end of 2019. Active users have now made an average of 37.9 payment transactions over the trailing 12 months, a 9% increase year over year.
PayPal's large user base gives it a powerful network effect, meaning that the more people who join its network, the more valuable its platform becomes. As more users join, more merchants will want to accept PayPal as a method of payment to entice these potential customers. As merchants join, the platform becomes more attractive to more consumers. This will make it difficult, at best, for other competitors to assail PayPal's dominant position in developed markets where it has a large presence.
A fast-growing fintech with lots of potential
Matt Frankel, CFP (Square): One fintech stock that has been on my radar consistently in recent years is Square. The company's growth story continues to dazzle me, and I think that we could still be in the early innings.
In 2018, Square's adjusted revenue grew by a staggering 64% over 2017, and results in all of Square's business segments look impressive. In the core payment-processing business, Square's payment volume grew 28% year over year in the fourth quarter. Square Capital, the company's business-lending platform, saw loan originations grow by 55% from the same quarter a year ago. And subscription and services revenue more than doubled year over year, not including the company's acquisitions. I could go on...
Even so, the company's current business pales in comparison with its long-term opportunities. The core payment-processing business has captured about 2% of its addressable market (and that's a conservative estimate). Square Capital is at a similarly low percentage of its potential. And, Square's Cash App is perhaps the biggest opportunity of all. With over 15 million monthly active users, this is a huge opportunity for Square to cross-sell additional financial service products -- management has previously mentioned personal lending, an investment platform, and a deposit account as potential avenues for growth.
Square isn't consistently profitable just yet, having posted a net loss in four of the last five quarters and preferring to invest as much as possible into growth. And, with this kind of opportunity, investors should be glad it is.
Offering a guide for insurance companies
Dan Caplinger (Guidewire Software): Many investors find the insurance industry to be boring, but it's still a huge industry that requires a lot of coordination in order to run smoothly and efficiently. Guidewire offers the core back-end software that property and casualty insurance companies use to power their operations, with more than 375 clients in 35 different countries. The software platform covers all phases of the relationship between insurers and their customers, starting with digital engagement in marketing and sales and then moving forward to information management for customer service representatives working with policyholders. Greater levels of automation allow sales reps to be more responsive to potential clients, and the ability to customize offerings makes the Guidewire platform attractive to insurance companies that have already invested a lot in their own brands.
Guidewire is just now beginning to be profitable, and the company still has a long way to go before it can deliver the kind of financial results that investors like to see. Moreover, challenges in the insurance industry could have an impact on the willingness of insurers to sign on with the Guidewire platform. However, many users have given positive reviews of the service and its value, and if adoption rates continue to rise, then Guidewire could well turn out to be the winner in an increasingly important part of the financial industry.